Income Tax Act 1961 Section 135

Income Tax Act Section 135 deals with Corporate Social Responsibility (CSR) obligations for companies meeting specific financial criteria. It requires eligible companies to spend a minimum percentage of their profits on social welfare activities. This section is crucial for businesses, tax professionals, and stakeholders to ensure compliance with CSR norms and avoid penalties.

Understanding Section 135 helps companies align their social initiatives with legal mandates. It also aids tax consultants and auditors in advising clients on CSR compliance and reporting requirements under the Income Tax Act, 1961.

Income Tax Act Section 135 – Exact Provision

This section mandates certain companies to form a CSR committee and spend a specified portion of profits on social causes. It ensures that profitable companies contribute to community development and sustainable growth. The provision promotes transparency and accountability in CSR spending.

• Applies to companies meeting net worth, turnover, or profit thresholds.

• Requires formation of a CSR committee.

• Mandates spending at least 2% of average net profits on CSR.

• Focuses on social, environmental, and community welfare activities.

• Non-compliance may attract penalties under the Companies Act.

Explanation of Income Tax Act Section 135

Section 135 specifies CSR obligations for eligible companies. It applies to companies incorporated in India, including foreign companies with branches here.

• Companies with net worth ≥ Rs. 500 crore, or turnover ≥ Rs. 1000 crore, or net profit ≥ Rs. 5 crore.

• Requires constituting a CSR committee from the board members.

• Mandates spending at least 2% of average net profits of last three years on CSR.

• Spending must be on activities listed in Schedule VII of the Companies Act.

• Non-compliance must be disclosed in the annual report.

Purpose and Rationale of Income Tax Act Section 135

This section promotes responsible business conduct by ensuring companies contribute to social welfare. It encourages sustainable development and reduces income inequality.

• Ensures fair contribution by profitable companies to society.

• Prevents neglect of social responsibilities by businesses.

• Encourages transparency and accountability in CSR activities.

• Supports government efforts in social and environmental development.

When Income Tax Act Section 135 Applies

The section applies during the financial year when the company meets prescribed financial thresholds. It is relevant for annual CSR planning and reporting.

• Applicable from the financial year when thresholds are met.

• Relevant for companies incorporated in India.

• CSR spending calculated on average net profits of preceding three years.

• Exemptions or relaxations may apply to newly incorporated companies.

Tax Treatment and Legal Effect under Income Tax Act Section 135

CSR expenditure under Section 135 is not treated as business expenditure for tax deduction under the Income Tax Act. However, it is mandatory under the Companies Act, 2013. Non-compliance may attract penalties but does not directly affect taxable income.

• CSR spending is not deductible under Income Tax Act Section 37.

• Does not reduce taxable income or business profits.

• Mandatory compliance under Companies Act, enforced through penalties.

Nature of Obligation or Benefit under Income Tax Act Section 135

Section 135 imposes a mandatory compliance duty on eligible companies to spend on CSR. It does not provide direct tax benefits but promotes corporate accountability.

• Creates a compliance obligation for eligible companies.

• Mandates CSR committee formation and spending.

• No direct tax deduction or exemption benefits.

• Benefits society through funded welfare activities.

Stage of Tax Process Where Section Applies

Section 135 applies primarily during the financial year for CSR planning and spending. It influences annual reporting and board compliance but not tax return filing directly.

• Relevant at income computation and profit calculation stage.

• Impacts board meeting and CSR committee decisions.

• Disclosures made in annual reports and financial statements.

• Not directly linked to tax return filing or assessment.

Penalties, Interest, or Consequences under Income Tax Act Section 135

Non-compliance with CSR obligations under Section 135 attracts penalties under the Companies Act, not the Income Tax Act. Penalties include fines on the company and officers responsible.

• Penalties under Companies Act for failure to spend or disclose CSR.

• No interest or penalty under Income Tax Act for CSR non-compliance.

• Possible reputational damage for companies.

Example of Income Tax Act Section 135 in Practical Use

Assessee X is a company with a net profit of Rs. 10 crore in the last financial year. It meets the threshold for CSR compliance. The company forms a CSR committee and allocates Rs. 20 lakh (2% of average net profits) to fund education and health projects. The CSR spend is disclosed in its annual report, fulfilling Section 135 requirements.

• Ensures legal compliance with CSR norms.

• Promotes social welfare through corporate funds.

Historical Background of Income Tax Act Section 135

Section 135 was introduced alongside the Companies Act, 2013 to formalize CSR obligations. It evolved from voluntary CSR practices to mandatory spending. Amendments have clarified thresholds and reporting requirements.

• Introduced in 2013 with Companies Act.

• Thresholds and spending limits defined over time.

• Judicial interpretations emphasize compliance and transparency.

Modern Relevance of Income Tax Act Section 135

In 2026, Section 135 remains vital for corporate governance and social responsibility. Digital filings and AIS reporting enhance transparency. It impacts how companies plan budgets and engage in sustainable development.

• Mandatory digital CSR disclosures in annual filings.

• Supports government’s sustainable development goals.

• Encourages corporate philanthropy aligned with tax compliance.

Related Sections

• Income Tax Act Section 37 – Business expenditure deductions.

• Income Tax Act Section 80G – Donations and tax benefits.

• Companies Act Section 135 – CSR obligations.

• Income Tax Act Section 139 – Filing of returns.

• Income Tax Act Section 234A – Interest for default in return filing.

Case References under Income Tax Act Section 135

No landmark case directly interprets this section as of 2026.

Key Facts Summary for Income Tax Act Section 135

• Section: 135

• Title: Corporate Social Responsibility

• Category: Compliance, social responsibility

• Applies To: Companies meeting financial thresholds

• Tax Impact: No direct tax deduction for CSR spend

• Compliance Requirement: Mandatory CSR committee and spending

• Related Forms/Returns: Annual report disclosures

Conclusion on Income Tax Act Section 135

Income Tax Act Section 135 integrates corporate social responsibility into the legal framework for companies. While it does not provide direct tax benefits, it mandates socially responsible spending by profitable companies. This fosters sustainable development and accountability.

Companies must understand and comply with Section 135 to avoid penalties under the Companies Act and to contribute meaningfully to society. Tax professionals should guide clients on CSR compliance alongside tax planning for holistic governance.

FAQs on Income Tax Act Section 135

Who is required to comply with Section 135?

Companies with net worth of Rs. 500 crore or more, turnover of Rs. 1000 crore or more, or net profit of Rs. 5 crore or more must comply with Section 135.

Is CSR expenditure deductible under the Income Tax Act?

No, CSR spending under Section 135 is not deductible as a business expense under the Income Tax Act.

What is the minimum CSR spending required?

Eligible companies must spend at least 2% of the average net profits of the preceding three financial years on CSR activities.

What happens if a company does not spend the required CSR amount?

Non-compliance can lead to penalties under the Companies Act, including fines on the company and responsible officers.

Are foreign companies operating in India subject to Section 135?

Yes, foreign companies with branches or operations in India meeting the thresholds must comply with Section 135 CSR obligations.